Where the Wild Cats Howl, Part I

"I have hedge fund managers literally in tears on the phone..." - a
London broker, quoted this week

ODD THINGS were happening to the price of Volkswagen - the world's
third-largest auto-maker - long before it leapt 187% higher inside two days
at the end of October. For a brief moment, and amid the worst-ever stock market
rout in history, VW became the planet's most highly-valued corporation bar
none at the end of October.

Yet it was already worth more than all other European and US car-makers combined.
And VW's stock hadn't fallen but risen during 2008 to date - an odd
move for the "people's car" marque.

Like everyone else, after all, VW is facing a global recession. Its peers,
in contrast, have either collapsed or drifted lower, led by the 90% rout in
GM shares. So betting that VW would also fall in due course thus looked a safe
bet. So safe, in fact, you might wonder why wealthy investors and large institutions
would bother paying a hedge fund to take that bet for them.

Maybe it's the "prime broker" access to exotic markets offshore...enabling
bearish US investors to profit even after short-selling in GM and Ford was
banned this September. Or perhaps it's the uniform that draws in the punters
- you know, the bepoke lounge suit, open-necked cashmerello shirt, thickly
fudged hair and (for extra "bite me!" pizazz) a pair of kooky nerd glasses.

Because it surely can't be the fees...starting, or so legend has it, at 2%
flat plus 20% of any gains you might make. And legend might be all that remains
of the bubble in hedge funds by the time the global meltdown in finance is
finished.

We'll get round to that in Part II. Because back in VW's stock, fresh madness
showed up in mid-September, starting with a series of short, sharp jerks higher.
VW's stock doubled in price - and doubled on wildly erratic volume - even as
Chinese car sales were reported one-tenth lower for August. SUV sales in the
US sank by one-half from the same time last year.

Oh sure, the price of VW then fell (and fell hard), but only back to a two-month
low of €200. And then, for all those hedge funds waiting to make a killing
when reality bit, came the gotterdämmerung in Frankfurt's Xetra Dax market...

Monday, 27th Oct., saw an Arctic chill blow freezing winds and even snow down
into Western Europe. It also saw luxury car-marque Porsche exercise options
to buy almost 40% of VW's shares.

That not only caught bearish hedge funds napping. It also took Porsche's holding
to a massive 74.1% of all shares in issue. And so with the Germany state of
Saxony holding a further twenty per cent (the car maker's main operations are
based there), the VW bears were left scrambling to buy back their shorts.

The pool of stock available outside Porsche and Saxony's investment, however,
is now less than half the size needed. Oh...bother!

"I have hedge fund managers literally in tears on the phone," said one London
broker to the financial press. The host of BBC's Today program couldn't
stifle his mirth. Even the Financial Times - an essential prop for any "wild
cat" hedge fund setting up shop amid the last decade's bubble in credit and
leverage - got in a dig:

"Porsche used to be the emblem of a go-go City trader. Now it has become one," guffawed
the Lex column before the true craziness broke. "Fast cars and fast money make
a terrible combination."

Hedge funds get stuffed? What a hoot! Never mind that your retirement plan,
perhaps, lies amongst the casualties. UK pension funds raised their allocation
to these go-go managers by more than 60% in 2007. The Japan Pension Fund Association
raised its allocation to hedge funds six times over in the year to July '08.

But what's not to love about the headline "Hedge funds lose (over-priced)
shirt"...? "About 13% of VW's shares were lent out for short-selling, the highest
proportion among large German companies," explains the FT. The free
float of shares not held by Porsche or Saxony, on the other hand, stands at
just 5.8%. Hence the rush to buy stock to cover those shorts. Hence Tuesday's
spike to €1005 per share...precisely five times Friday's low...in the "greatest
short squeeze in history" as one analyst called it.

For a 5% or merely 2% flat-fee per year, you might at least expect your hedge-fund
manager to look askance at VW's odd behavior going into October's record jump.
Porsche already held 35% of the stock; Saxony clearly plans to stick with its
20.1% for time immemorial. What's more, Germany's classically European regulations
meant Porsche was known to have options...but didn't have to declare their
size.

Plainly something odd was happening...something only the foolhardy or idiotic
would want to meddle with. So step forward the German investment regulator,
Bafin, who now finds the VW trade already jammed tight with fools and idiots.

More than 100 hedge funds are reckoned to have applied their brains to this "no
brainer" bet, says the FT - funds including big names like Greenlight
Capital, Glenview Capital, Marshall Wace, Tiger Asia, Perry Capital and Highside
Capital according to the Wall Street Journal, plus one of the UK's longest-standing
hedge funds, Odey Asset Management...as well as the world's most expensive
manager, SAC Capital.

SAC doesn't waste time charging not 2-and-20 (as the more standard charge
of 2% flat plus 20% of gains is known), but a massive 5-and-50. Or so legend
has it. Again, legend might soon be all that remains.

Roughly put, VW's short squeeze may have cost the bears high €30 billon
($38bn). It "will leave no winners" as one loser puts it. And the great deleveraging
ain't finished yet out there in Mayfair and Connecticut...out where the "wild
cats" howled all through the greatest bubble in credit yet seen.

Formerly City correspondent for The Daily Reckoning in London and head of
editorial at the UK's leading financial advisory for private investors, Adrian
Ash is the head of research at BullionVault,
where you can buy gold
today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the
secure, low-cost gold and silver exchange for private investors. It enables
you to buy and sell professional-grade bullion at live prices online, storing
your physical property in market-accredited, non-bank vaults in London, New
York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people
from 97 countries used BullionVault,
owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical
silver (US$129m) as their outright property. There is no minimum investment
and users can deal as little as one gram at a time. Each user's unique holding
is proven, each day, by the public reconciliation of client property with formal
bullion-market bar lists.

BullionVault is a
full member of professional trade body the London Bullion Market Association
(LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious
Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development
body the World Gold Council (www.gold.org)
joined with the internet and technology fund Augmentum Capital, which is backed
by the London listed Rothschild Investment Trust (RIT Capital Partners), in
making an $18.8 million (£12.5m) investment in the business.

Please Note: This article is to inform your thinking, not lead it.
Only you can decide the best place for your money, and any decision you make
will put your money at risk. Information or data included here may have already
been overtaken by events - and must be verified elsewhere - should you choose
to act on it.